Stock prices fluctuate repeatedly, as their values increase and decrease (sometimes dramatically) in a single day of trading. Beginner investors may wonder why this happens.
The Stock Market is a Public Auction
At its core, the stock market is a public auction where buyers and sellers negotiate the prices of equity shares in publicly traded companies. Traders in the stock market can be individuals, governments, companies, institutions, or asset management firms. Like any other market, supply and demand are the primary factors that drive stock prices. Significant price fluctuations occur due to other factors such as major financial news, natural disasters, and investor reactions to companies’ financial data or price speculation.
Supply and Demand
Stock prices are influenced by supply and demand. Since the stock market operates like a public auction, when there are more buyers than sellers, the price must adjust, or no trades will occur. This situation tends to push the price higher, increasing the market price at which investors can sell their shares and prompting investors to sell when they might not have considered doing so previously. On the other hand, when there are more sellers than buyers and less demand, those willing to make the lowest bid determine the price, leading to competition to reach the lowest price.
What Affects Sellers and Buyers
On ordinary days, stock values do not move much. Prices typically rise and fall by one or two percentage points, with larger fluctuations at times. However, events can sometimes occur that lead to a sharp increase or decrease in stock value.
External Events
The increase in trading can stem from an earnings report that shows good or bad financial news. It could be a significant financial event such as interest rate hikes, or even a natural disaster like a hurricane that is likely to have widespread repercussions. Any of these events can lead to market reactions, prompting investors to rush to sell or buy. These reactions can be driven by emotions or be the result of calculated decisions; either way, they can affect the stock price.
Investor Analysis
Investment patterns can vary significantly and affect stock sales. For instance, a company that issues a poor earnings report may cause panic among some of its shareholders, leading them to sell their shares and driving the price down due to increased supply over demand. On the other hand, some investors may see the bad news as temporary and recognize an opportunity to buy shares at a lower price before the stock price rises again.
Other factors affecting stock prices can lead speculators – those who buy and sell based on a company’s non-fundamental value – to push stock prices into excessive territory. They contrast with investors who are only interested in buying stocks at a discount to their true value, confident that they will appreciate over time.
Frequently Asked Questions
How often do stock prices change?
When many people refer to a stock’s price, they mean the price of the last trade. Thus, the price changes every time a new trade occurs, unless that trade is at the same price as before. Large-cap stocks, like Apple, trade millions of times daily, and the stock price can change with each of those trades. Low-value stocks with weak demand may trade several thousand times a day, meaning the price changes less frequently.
Why
Do stock prices vary between brokers?
In theory, you should pay the same price for a share regardless of the broker. In reality, slight differences in details such as execution time or fee structure can lead to minor price variations. The more liquid the securities, the less likely small differences will impact the price. If you’re concerned about price discrepancies, it’s best to use a limit order that guarantees a specific price.
Source: https://www.thebalancemoney.com/why-do-stock-prices-fluctuate-356347
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